A Basic Guide to Trusts

What is a Trust?

A Trust is a legal entity which can own property. Usually a Trust is governed by a legal written document called a Trust Deed or a Declaration of Trust, which specifies all the details.

How does it work?

There will be some form of property held within the Trust, given to the Trust by its original owner, referred to as the Settlor. There will be a group of Trustees who together will deal with all aspects of the Trust, and who legally own the property given to the Trust by the Settlor and now held within the Trust. The Trustees will be given permission by the Declaration of Trust to give any of the property, or any income from it, or any benefits from it, to a group of other people specified in the Declaration of Trust; these will be referred to as Beneficiaries.

What is the Metfriendly Trust Deed intended for?

This Declaration of Trust establishes a Trust that is intended to hold a Metfriendly single life Mortgage Protection Plan or Level Term Assurance, with or without critical illness cover, and whether an existing policy or a new one being applied for.

The policy will specify who will receive the life insurance death benefit, while the terminal illness, and/or the critical illness payment will remain payable only to you (via the Trustees), the original policyholder and Settlor.

It is NOT intended that any other assets should be placed in the Metfriendly Trust including joint life policies (where the benefit is payable directly to the survivor anyway), or for savings or investment contracts or policies of any other company.

Why would anyone want to put a life policy in a Trust?

1. Gets the money when it is most needed. If the policy is placed in a Trust, the Trustees don’t have to wait for probate to be granted (which can take months or even longer if you have not made a Will) so the life insurance payment can go – via the Trustees – to the chosen Beneficiary/ies without delay;
2. Protects assets from third parties. Without a Trust, the life insurance payment will be added to assets within the deceased’s Estate when probate is granted. This means that the life insurance payment could be used to pay any debts that are outstanding on death. With a Trust, the Trust assets do not belong to the deceased and so cannot be used to pay off any outstanding debts;
3. Reduces inheritance tax liability. If the life insurance isn’t placed in a Trust it automatically becomes part of the deceased’s Estate, which could increase the chances of inheritance tax being due. Putting the life insurance policy in Trust means that Inheritance Tax should not fall due on the death benefit;
4. For children under 18. If the deceased leaves behind children under the age of 18, the Trustees could use the Trust to support them. Once they turn 18 they can have full access to the money in the Trust.

How do I fill it in?

See the “Guide to filling in the Declaration of Trust” on page 15 of the Declaration of Trust (PDF).

What happens next?

Send the original completed Declaration of Trust to us, we will acknowledge receipt and note our files accordingly, so if anything happens to you we can alert the Trustees on your behalf (however see “What happens if I am diagnosed with a Terminal Illness?” or “What happens if I am diagnosed with a Critical Illness?” below).

We will keep the original Trust Deed for you, and electronic copies will be available if required. The Trustees should retain copies for their own reference.

Make sure your next of kin are aware so if anything happens to you, they know where the details are, and how to alert the other Trustees and us.

Also remember to tell any legal or financial advisers (if you are getting legal or financial advice) that the Trust exists, so they can make allowance for it in their plans/actions.

Who pays the premiums?

You, the Settlor of the policy, must continue to pay the premiums yourself, otherwise, unless the Trustees are able and willing to pay the premiums themselves, the policy will lapse (cease to exist) without value and the Beneficiaries will not receive anything on your death.

Who owns the policy?

Once the Trust has been correctly set up, the policy will belong to the Trustees and you will not have total and complete control over it, except as a Trustee together with the other Trustees, and as the sole Beneficiary under the “Retained Benefits” (the terminal illness and, where applicable, critical illness benefits).

Who are the Trustees?

The Trustees manage the trust and are responsible for ensuring that the life insurance payment is distributed to the Beneficiaries according to the Settlor‘s wishes. You have to specify who the Trustees are, but they can be removed and others added during the lifetime of the Trust. You should try to allow a sufficient number to ensure no problems arise – you probably won’t be available to sort out problems if your policy comes to pay out! As the Settlor, you are automatically a Trustee of this Trust. We strongly recommend that you appoint at least one Additional Trustee, and it is advisable to have at least two Additional Trustees; the Declaration of Trust has room for up to three. A Trustee must be over 18 years of age.

The Declaration of Trust allows for the appointment or removal of Trustees. Any changes must be notified in writing to Metfriendly.

How should I choose the Trustees?

• They must be over 18.
• They must agree to act as Trustees.
• They should ideally be able to agree amongst themselves and with you, or at least understand and agree with your aims and intentions.
• Have a sufficient number to ensure that your wishes can be carried out in the event of your death.
• Try to choose people who are young enough to be likely to be alive at the time of your death.
• Preferably located within easy distance of you and each other for meetings and ease of action on your death.

Who are the Beneficiaries?

The Beneficiaries are those who will benefit from the life insurance payment on your death. Anyone can be selected – for example your spouse or civil partner, partner, children, grand-children, brother, sister or nonfamily member – and you can specify the percentage of the payment allocated to each of them; otherwise the Trustees will decide on the allocation if payment occurs.

If you have a mortgage, you may be tempted to put the lender as the Beneficiary, to pay off the mortgage directly – but beware, you may change your lender or your mortgage, and this could be troublesome to change in the Trust. It may be better to name an individual who will pay off any debts should you die.

The Beneficiaries can be changed but this can only be done by the Trustees by Deed. This means that all of the Trustees would need to agree on adding or removing Beneficiaries.

What would happen on my death?

The Trustees should contact us to start the claims process. Under the terms of this Trust, the Beneficiaries will be entitled to receive the full death benefit under the policy from the Trustees, in the proportions specified in the Declaration of Trust, or in whatever other proportions they decide. It will not form part of your Estate for Inheritance Tax purposes.

What happens if I am diagnosed with a Terminal Illness (where death is expected within 12 months)?

Receiving such a diagnosis is going to be a great shock – and you will need time to take it all in. However, as soon as you possibly can, you should inform the other Trustees (perhaps by contacting and informing one of them who will tell the others) so they can contact us to start the claims process. You could also inform us so we can explain the documents we need from you, but the Trustees may do this for you. We will deal with you in relation to any medical information we need. Under the terms of this Trust, you, the original policyholder, will be entitled to receive the full Terminal Illness benefit under the Policy from the Trustees. It will then form part of your Estate for Inheritance Tax purposes – unless you spend it, or gift it within the Inheritance Tax gift exemptions before your death.

What happens if I am diagnosed with a Critical Illness?

If your policy includes critical illness cover, we will need to establish whether it covers your diagnosis. If you are unsure please contact us in the first instance. You should then inform the other Trustees (perhaps by contacting and informing one of them who will tell the others) so they can contact us to start the claims process. You could also inform us so we can explain the documents we need from you, but the Trustees may do this for you. We will deal with you in relation to any medical information we need. Under the terms of this Trust, you, the original policyholder, will be entitled to receive the full Critical Illness benefit under the policy from the Trustees. It will then form part of your Estate for Inheritance Tax purposes – unless you spend it, or gift it within the Inheritance Tax gift exemptions before your death.

Do I need advice?

Creating a Trust can have taxation as well as legal consequences as once the Trust has been created it cannot be revoked. Trustees have a special duty to the Beneficiaries and the misuse of a Trust power by a Trustee can make him/her personally liable for any resulting loss to the Beneficiary.

We would normally suggest that, just as with anything involving legal processes and tax, you contact a legal or finance professional to get their advice and input, to ensure you are doing the right thing and doing it correctly. However, if your circumstances are complicated you should always do so – a trust may conflict with a Will, or with an assignment, or with a Nomination under the Friendly Societies Act, and if a problem or dispute arises, it will almost certainly happen when a claim arises and you will be in no position to sort it out; indeed many things to do with Trusts are by their very nature irrevocable.

Any references to tax treatment for the Trust are based on Metfriendly’s understanding of legislation and HM Revenue & Customs practice at the time of publication. Both of these are likely to change in the future, and a liability to tax may arise under an existing arrangement. Every care has been taken as to accuracy, but it must be appreciated that Metfriendly cannot accept responsibility for loss, however caused, suffered by any person who has acted or refrained from acting as a result of material published.